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MND NewsWire features plain and simple interpretations of industry related data and events written in a manner that maintains the interest of random readers while still catering to the perspective of a housing market professional.

Insurance companies that write Director and Officer's (D&O) and Errors and Omission (E&O) insurance are debating what the future holds in the way of class action litigation against their policy holders.

Writing in Business Insurance, Dave Lenckus outlines the pros and cons of whether insurance companies such as Liberty Insurance Underwriters could be hit hard should the subprime crisis begin to impact companies outside the financial services sector.

One school of thought, according to Lenckus, is that "errors and omissions liability litigation could envelope companies that facilitated home purchases by subprime risks who eventually defaulted," and by extension, directors and officers at non-financial services sector that shareholders think failed to disclose how they would be affected by the credit crisis.

He cites as examples appraisers, "fee hungry" mortgage brokers, and real estate agents who participated in putting home buyers into subprime mortgages they could not afford.

There may also be, as Lenckus puts it, an unknown number of "widget manufacturers" which bought various mortgage-backed financial instruments as investments that must now be devalued. This will impact the company's bottom line and provide an impetus for shareholder suits.

Even companies that did not invest in subprime instruments may be vulnerable. Companies that turned to other investments still face lower values, because the subprime mess has weakened the bond insurers that covered the issuers of those instruments.

Even the economic downturn could create a D&O liability threat, experts say.

"Toll Brothers Inc., a Horsham, Pa.-based builder of luxury homes that did not have a lending operation, already is defending against such a claim. Investors charge that they were misled by Toll's assertions that its business model was immune to the credit crisis. Demand for the builder's homes did shrink, however, and its stock price nosedived."

Other experts, however, say that, apart from those hundreds of people who have been arrested by the FBI in the last few months for various forms of mortgage fraud, shareholder victims will mostly blame the companies that created the problems rather than the directors and officers or the employees that carried out corporate orders. So far, plaintiffs are doing that, principally targeting the financial institutions.

The subprime mortgage situation, by most accounts, is expected to cost financial institutions as much as $400 billion in credit losses and write-offs of subprime mortgage securities.

In setting rates for D&O and E&O policies, insurers weigh current rather than expected losses, so any expectations for future losses would not be factored into the rate calculations and rates for these policies are falling as much as 15 percent for companies outside the financial services sector. But underwriters are asking applicants a lot of questions about their exposures to mortgage-related risks and restricting policies to existing coverage by "beefing up the pending and prior claims provisions in renewed policies."

But reality has hit home for financial sector companies, including real estate companies, which are looking at 100 to 200 percent premium increases and trouble finding coverage.

Comments

Toll Brothers DOES have a mortgage company: TBI Mortgage: tbimortgage.com. Most of the big builders do, and so do many medium sized builders, or at least an "affiliated business arrangement" with a lender, title co's, etc. This is where consumers often get into a predatory lending type trap, when they don't shop around and compare, but just go with what's seemingly convenient. Every builder complaint I've seen where lending was part fo the problem, the buyer used the builder's lender. So complaints nowadays are not just about shoddy construction but shoddy lending, too.

mark B

on

They still have not learned anything
These servicing companies (Homeq for one) are taking loan modification customers and adding on late fees, pushing the problem out 5yrs with interest only loans on 1st and 2nds in hope that the market will be back when the loan comes out of its "modification:
These borrowers were not qualified on the future payment or the present payment. This is as ileagal as it gets and no one is looking at the servicer.
The true problem is the margin which is as high as 6%-7%on top of a even higher index (libor)
we are left with mortages that are going to double in 5 yrs because of these practices
they will be amortized over 22-23 yrs the marging will be 6% and the index will probably still not change 6%. Why is the government allowing this to happen. we delay some foreclosures but 5 yrs from now thew problem will be huge...

Justin Tyburski

on

Mark B, Its no ones fault but the consumer. These lending institutions are giving options to these clients. As a broker there isnt a difference in compensation to the broker, as everyone outside the industry thinks. Consumers need to do their research and stop being lazy. If the government has to now monitor consumer choices then we might as well become a communist nation. We as a nation get ourselves into trouble and always expect the government to bail us out. We need to bring back debtors prison and send people back to 1st grade mathematics. And many people in this nation need a boost of some COMMON SENSE! I almost hate this country. So many stupid people....

keneth

on

why are these banks allowed in courts with unclean hands they have stolen and robbed americans blind and then the courts help them further, the summit county courts let them get away with murder someone needs to put a stop to the judicial misconduct that is occuring in favor of big banks, over homeowners.

Danielle

on

I like the idea of E&O insurance. Rates based on the present risk instead of some hodgepodge of algorythms, credit scores and need for pocket money! Think about your homeowner's policy. Fifty pages declaring that your home and it's contents will, under no circumstance, be covered! To heck with perils! I will simply state that I omitted the words "Stuck a match" when I put a claim in for the destruction by fire! Or, I erred when I stated that the basement never flooded! Saves a lot of time and I will collect from my cheap skate insurer.

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